Puerto Rico teeters on fiscal edge over pensions

A retiree carries a sign that reads in Spanish “Do not play with my pension” during a protest outside the government pension headquarters in San Juan, Puerto Rico, Wednesday, Jan. 30, 2013. Puerto Rico is confronting what economists and financial analysts say is a ticking fiscal time bomb: A public pension system with a $37.3 billion unfunded liability that must be addressed soon, at a time when the U.S. island territory's government has little money to spare, or thousands of retirees could start to see benefit cuts. (AP Photo/Ricardo Arduengo)
— AP

A retiree carries a sign that reads in Spanish “Do not play with my pension” during a protest outside the government pension headquarters in San Juan, Puerto Rico, Wednesday, Jan. 30, 2013. Puerto Rico is confronting what economists and financial analysts say is a ticking fiscal time bomb: A public pension system with a $37.3 billion unfunded liability that must be addressed soon, at a time when the U.S. island territory's government has little money to spare, or thousands of retirees could start to see benefit cuts. (AP Photo/Ricardo Arduengo)
/ AP

People protest outside the government pension headquarters in San Juan, Puerto Rico, Wednesday, Jan. 30, 2013. Puerto Rico is confronting what economists and financial analysts say is a ticking fiscal time bomb: A public pension system with a $37.3 billion unfunded liability that must be addressed soon. Nearly three years ago, former Gov. Fortuno established a committee charged with solving the pension fund's fiscal problems, noting that the overall system was paying $679 million more a year than what it received in contributions. (AP Photo/Ricardo Arduengo)— AP

People protest outside the government pension headquarters in San Juan, Puerto Rico, Wednesday, Jan. 30, 2013. Puerto Rico is confronting what economists and financial analysts say is a ticking fiscal time bomb: A public pension system with a $37.3 billion unfunded liability that must be addressed soon. Nearly three years ago, former Gov. Fortuno established a committee charged with solving the pension fund's fiscal problems, noting that the overall system was paying $679 million more a year than what it received in contributions. (AP Photo/Ricardo Arduengo)
/ AP

SAN JUAN, Puerto Rico 
Office clerk Lillian Marti hopes to retire one day with a decent pension. Now, like many other employees of Puerto Rico's government, she's beginning to fear she might not get that chance.

"Of course, I'm worried," said the 61-year-old, who has worked for the government for 20 years.

Some experts are calling for cutting benefits to help Puerto Rico confront what economists and financial analysts say is a ticking fiscal time bomb: A public pension system with a $37.3 billion unfunded liability that must be addressed soon, at a time when the U.S. island territory's government has little money to spare.

The unfunded liability, which is spread across three public pension systems, is almost four times the annual government budget for the island of nearly 4 million people. Only a few much larger U.S. states, such as California and Illinois, face bigger unfunded liabilities.

Puerto Rico's problem stems from decades of neglect as politicians facing budget deficits were unwilling to set aside money for the growing ranks of retired police, firefighters, teachers and office workers. Now many analysts and even some government officials concede it is the most critical issue facing the administration of newly elected Gov. Alejandro Garcia Padilla.

"This is the most important financial issue right now," said Gustavo Velez, a prominent Puerto Rican economist. "They have to find a solution. They have to create a plan in the next three months."

Velez and others suggest that Puerto Rico should immediately reduce benefits, raise the retirement age and demand increased contributions from current employees, ideas that don't sit well with people like Marti.

"Imagine, I'm going to be left without a big chunk of money that I contributed," she said.

Garcia, who defeated the incumbent with support of the public employee unions, has formed a committee to come up with suggestions. He has not yet said how he will address the situation. Simply taking the money from the island's general fund is out of the question: Puerto Rico has a projected deficit this year of $1.2 billion.

"It's a very complex situation," Garcia said at a recent news conference. "We will respect the pensions of those who contributed and built this country."

The island only recently emerged from a six-year recession and the unemployment rate is 14 percent, higher than any state. Manufacturing, the largest segment of the economy, has been in decline for years. Former Gov. Luis Fortuno laid off more than 20,000 government workers. His predecessor, Anibal Acevedo Vila, was forced to partially shut down the government for two weeks in May 2006 in a standoff over budget talks with the legislature.

In the meantime, the pension system's deficit kept growing.

"It's not that we're bad off. We're broke," said Miguel Morales, a consultant to a permanent committee charged with regulating the pension system. "The concern is that there will come a day when the government cannot respond and everyone will be left out on the street."

Nearly all of the problem centers on two pension systems - one for teachers and one for other government workers - that stopped accepting new beneficiaries in January 2000. They serve more than 273,000 active and retired government workers.